Non-performing loans are an extremely relevant issue for central banks and for economic policy in general, as bank solvency and overall financial stability rely on the ability and willingness of borrowers to repay their debts. Based on annual information covering 1998-2005 from the credit bureau (Central de Deudores) managed by the Central Bank, the goal of this paper is to describe the evolution of non-performing commercial loans (broken down by borrower size and bank ownership structure) and to identify, using econometric tools, the macro and microeconomic factors affecting the loan quality portfolio. The sample includes over 192,000 firms. The main results are as follows: (1) Non-performing loans display a high correlation with the business cycle, although this correlation weakened temporarily during the 2002-2003 crisis, mainly as a result of regulatory forbearance measures; (2) Even though the proportion of non-performing loans have returned to their precrisis level, the share of non-performing borrowers continues to be very high. In 2005, approximately 1 in 3 debtors was facing repayment problems. This figure was 1 in 5 in 1999, with a maximum of 1 in 2 in 2003; (3) In terms of borrower size, non-performing loans seem to follow an inverted U shape, with the higher values around intermediate loan amounts; (4) The borrowers entering the system in 2000 and 2001 have exhibited a better portfolio quality than other borrowers, leading to reject the hypothesis of moral hazard associated to the expectation of a government bailout; (5) The share of non-performing loans of public banks doubles that of private and foreign banks on average for 1999-2005. Strikingly, however, since 2002 foreign banks have a higher proportion of non-performing borrowers than public banks, and both are above that of private banks. Different specifications were run to estimate the likelihood of being non-performing. The set of borrower-level explanatory variables comprises: (a) Total indebtedness with the banking system; (b) The level of collateralized debt as a percentage of total debt; (c) The number of banks lending to the borrower; (d) The type of credit (distinguishing in particular short and long credit lines); (e) Bank ownership structure (domestic private, domestic public, and foreign); (f) Borrower’s sector of activity; and (g) Year dummies. Econometric results show that the probability of being on non performing: (a) increases with collateralized debt and, surprisingly, with debt size; (b) increases for clients of public banks and falls for those of private banks; (c) is higher when credit takes the form of an overdraft facility, but goes down when invoice discounting and –another surprising result– or personal loans are used; and (d) Although the above variable yield coefficients that are statistically and economically significant, the macroeconomic context (proxied by time variables) seems to exert a major influence on the probability of non performing.
